Steve Horwitz, over at Liberty & Power, makes a point that’s both important and too-often ignored. (Hat tip to Bob Higgs.) I blogged on a similar point earlier.
I’ve a hypothesis that I haven’t yet subjected to rigorous thought or testing, but that I strongly sense to point to something truthful. It’s this: the more wealthy a society becomes, the more difficult it is to quantify and measure changes in living standards. The reason is that part of growing prosperity is found in changes in the typical bundle of goods and services that consumers buy. Indeed, the very idea of a ‘typical bundle’ becomes more and more obsolete. Expansions in the number of choices and improvements in product and service quality — rather than mere increases in the quantity of long-familiar and relatively unchanging goods and servics — are more and more the order of the day in wealthier societies. Again, these improvements that make our lives better are very difficult to measure.
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It makes sense to me. I've read something before (don't recall where) that said the same thing. 80 years ago youm could count who had a phone and who didn't. Now almost everyone does. But some have better service than others, enhanced access, call-waiting, etc. An admittedly simple example.
Don, I believe your hypothesis is valid. Measuring prices of a bundle of goods and services has been notably difficult. Adding choice which often comes with wealth, only complicates the measurement as the substitution effect reeks havoc. This is why there continues to be disagreement over Laspeyres and Paasche indices. CPI and GDP deflator are examples of each and BOTH have short-comings with respect to substitution effect and availability of choice.
Measuring living standards, especially within wealthy societies, is more robustly accomplished with something like the Economic Freedom of the World Survey which the Academy has used to deomnstrate correlations (admittedly w/o causation) between wealth and socio-economic measures of well-being.
Happy and Prosperous New Year to ALL!
Your hypothesis is clearly correct, and I wish one of you professional economists would indeed quantify this area! I think of a continuum from left to right: same product/lower cost …to same product/better quality … to new product. The leftmost end is completely quantifiable, the rightmost end is unquantifiable.
An economy could stay on the left, and just concentrate on producing the same bundle of products, ever cheaper or in greater quantity. Then it would be easy to measure changes in living standards.
But as you move to the right, it's more difficult to assign a value to better quality; and further right, it's really difficult to assign a value to truly new things. (How much better off does a microwave oven, and iPod, and Internet access make me, as compared to grampa 50 years ago?)
A free, innvoative, complex, wealthy economy is heavily shifted to the right, where it's hard to put a number to these changes. The more right-shifted, the less accurately quantifiable. So i totally agree with you Don.
But is everything we shift into the monetary economy and count as real gdp a pure improvement? For example, in the old days when a woman stayed at home and cooked the meals we did not count the value added to that meal from her labor in the money and/or real gdp data . So now when we eat out more often we count the value added preparing that meal as income and output and count it as an increase in gdp. So to a certain extent much of the growth we have been counting is not really growth — it is just a shifting of production.
I know of no studies that have attempted to quantify the differences in these two impacts on our measurements on economic wealth — however you define it. So what we have is a mass of different possibilities
about how our knowledge might be improved that does not provide a clear cut case that we are either overstating or understating our well-being.
At least when new products come on the market they have a price where the market provides a value we can use to –imperfectly –judge its impact on our well-being. Of course there is a lag in incorporating the new products into out data system so the well-being of early adopters is undercounted. But by the time new products become wide-spread they are generally included in the data.
I think it would be a great value to some people to read or talk to the BLS people that actually have the job of incorporating quality changes into the price measurement system. You might find out that it does many things along these lines much better then is generally assumed– like measuring and incorporating the value added by call waiting, etc. Interestingly, I see many more questions that the BLS hedonstic pricing methodology causes it to overstate the drop in prices then that it understates inflation.
Replacing unpaid output of housewives with the paid output of food preparation workers and domestic help would cause GDP to grow – and also cause the average wage rate to decline, as I pointed out in another thread. But the impact was not very large after 1980.
I think the sheer growth of the civilian population accounts for much more of the GDP growth than does the movement of women out of the home. BLS statistics show that from 1960 to 2000, the civilian labor force increased by 104%. Growth in the civilian population accounted for an increase of 81%. The other 23% was due to increased participation: the percentage of the civilian population in the workforce grew from 59% to 67%. That percentage was 64% in 1980, indicating that the housewife effect was mostly complete by then.
A key tenet in free market economics is the accumulation of capital and the reinvestment of same for benefit of all. Please explain why today corporations have record free cash and are not reinvesting it. Most can only find that stock buybacks or special dividends are its most effective use. Why are the Darwinian forces not funneling this money to R&D and creative value creation? Over supply of products and services was not a problem in the early to mid 20th century, but in mature industries, it is real. A world awash in restless monetary assets is not sustainable. Sorry for the rambling, but again, I'd like to get a dialog going about today's economics and off the school boy hypothesis. Maybe then we can get some Libertarians on Capital Hill.
"Please explain why today corporations have record free cash and are not reinvesting it. Most can only find that stock buybacks or special dividends are its most effective use."
Capital investment by large corporations should not be made hastily. Capital spending plans of a large corporation such as Exxon are the result of years of advance research. If they suddenly realize unexpectedly high profits, perhaps a doubling of capital investment would not be prudent. Rather than invest internally in marginal projects I think they should pay the dividends and free the capital to be used elsewhere.
Please explain why today corporations have record free cash and are not reinvesting it. Most can only find that stock buybacks or special dividends are its most effective use.
It's also important to have liquidity in case something happens, such as the sudden implementation of, say, Know Your Customer regulations in USA PATRIOT or the odious Sarbanes-Oxley. In an environment where you can be regulated suddenly, for no good reason, you need flexibility to waste the money on compliance.
As a technologist, I am almost more amazed at the scope and scale of change than the general public. I'm not sure to what extent an effect such as Moore's Law can be factored into a one-dimensional metric like RPI. Given that for $1000 I can buy a machine more powerful than Birmingham University Physics department's 10 million pound mini-mainframe was in 1987, I can't see that as anythin other than a huge negative component in the 'basket'. One of my predictions for 2006 is that a TeraFLOPS of computer horsepower will routinely fall below $100,000. That's an enabling technology, and as such fairly invisble, but it has huge significance.